CapEx vs OpEx
Capital expenditure (CapEx) versus operational expenditure (OpEx)
With the advent of Cloud computing services are offered to customers without significant upfront costs or equipment setup time.
Approaches to investment
- Capital Expenditure (CapEx): CapEx refers to the spending of money on physical infrastructure up front, and then deducting that expense from your tax bill over time. CapEx is an upfront cost, which has a value that reduces over time.
- Operational Expenditure (OpEx): OpEx refers to spending money on services or products and being billed for them now, which we can deduct this expense from the tax bill in the same year. There is no upfront cost where we pay for a service or product as we use it.
Capital Expenditure (CapEx) Computing Costs
- Server costs – Includes all hardware components and the cost of supporting them. While purchasing servers, one must ensure to design fault tolerance and redundancy, such as server clustering, redundant power supplies, and uninterruptible power supplies.
- Storage costs – Includes all storage hardware components and the cost of supporting it. Note, based on the application and level of fault tolerance, centralized storage can be expensive.
- Network costs – Networking costs include all on-premises hardware components, including cabling, switches, access points, and routers. This also includes wide area network (WAN) and Internet connections.
- Backup and archive costs – This is the cost to back up, copy, or archive data. Options might include setting up a backup to or from the cloud. Involves an upfront cost for the hardware and additional costs for backup maintenance and consumables like tapes.
- Organization continuity and disaster recovery costs – Together with server fault tolerance and redundancy, one must plan for recovery from a disaster and continue operating with a plan of creating a data recovery site. It could also include backup generators.
- Datacenter infrastructure costs – These are costs for electricity, floor space, cooling, and building maintenance.
- Technical personnel – Based on the technology used, you’ll need technical expertise and workforce to install, deploy, and manage the systems in the datacenter and at the data recovery site.
Benefits of Capital Expenditure (CapEx)
With capital expenditures, you plan your expenses at the start of a project or budget period. Such that costs are fixed, meaning you know exactly how much is being spent. This is appealing when you need to predict the expenses before a project starts due to a limited budget.
Operational Expenditure (OpEx) Computing Costs
In cloud computing, many of the costs associated with an on-premises datacenter are shifted to the service provider. Cloud computing has a different set of costs such that for accounting purposes, all these costs are operational expenses –
- Leasing software and customized features – Using a pay-per-use model requires actively managing subscriptions to ensure users do not misuse the services, and that provisioned accounts are being utilized and not wasted. Cloud service provider de-provision the resources when they aren’t in use so as to minimize costs.
- Scaling charges based on usage/demand instead of fixed hardware or capacity – Cloud computing can bill in various ways, such as the number of users or CPU usage time. However, billing categories can also include allocated RAM, I/O operations per second (IOPS), and storage space. Plan for backup traffic and data recovery traffic to determine the bandwidth needed.
- Billing at the user or organization level – Subscription (pay-per-use) model is a computing billing method designed for both organizations and users. The organization or user is billed for the services used, typically on a recurring basis. Such that we can scale, customize, and provision computing resources, including software, storage, and development platforms.
Benefits of Operational Expenditure (OpEx)
Demand and growth can be unpredictable and can outpace expectation, which is a challenge for the CapEx model as shown in the following graph.
With the OpEx model, companies wanting to try a new product or service don’t need to invest in equipment. Instead, they pay as much or as little for the infrastructure as required.
OpEx is particularly appealing if the demand fluctuates or is unknown. Cloud services are often said to be agile. Cloud agility is the ability to rapidly change an IT infrastructure to adapt to the evolving needs of the business.